Ofwat points to gearing, dividends and pension deficits in financial resilience report

“Some water companies have more work to do to ensure they remain financially resilient,” said senior director Aileen Armstrong on publishing Ofwat’s fifth annual report on the financial returns and financial resilience, which seeks to enhance the transparency and accessibility of the financial information published by water companies.

Ofwat argued companies should “take steps where necessary to improve their financial resilience - such as by reducing gearing or by reducing dividends to retain equity in the business – to protect customers’ interests”. It said it expects investors to earn a reasonable return on their investment – “but it is important that the returns are transparent. The report reflects that any dividend, in whatever form and however it is paid, represents a part of a company’s total gross dividend yield.”

The report also captured the position on pensions and underlined companies’ responsibilities to manage all their liabilities responsibly – including pension deficits. Ofwat said: “While many companies’ accounts show a reduction in pension deficits at 31 March 2020, these reductions may reverse and may not be fully reflective of the underlying liabilities of the schemes. Companies need to take account of the impact of any potential underlying liabilities when considering their financial resilience.”